The Central Bank of Nigeria (CBN) has come under severe pressure from both local and international market forces urging it to fully liberalise the foreign exchange market and allow the naira float freely without further interference.
The pressure is coming amid concerns that CBN’s decision to stop banks from selling dollars to bureaux de change to (BDCs) may worsen the exchange rate at the parallel market.
While the naira has weakened 36 per cent since June this year to around N310 per dollar in the official market, investors say the exchange rate is still being manipulated.
The currency has fallen to N460 from N335 in the black market in that period as businesses struggle to access foreign exchange from their banks. The depreciation occurred despite continuous intervention by the CBN almost on weekly basis, in the market.
Chief Executive Officer, FMDQ Over-the-Counter Securities Exchange, Bola Onadele, accused the CBN of using “strong moral suasion” to prevent the naira from depreciating to a market-related level, and called on the regulator to let the currency float freely.
Onadele said the market’s dysfunction is hindering the country’s economic recovery by deterring inflows from foreign investors and hurting manufacturers dependent on imports. “What’s happening now, it’s not even a managed float,” Onadele said at the weekend. “I’m not sure what we’re doing. I don’t know the objective, the strategy and success benchmarks. The dealers and bank CEOs don’t want to be reprimanded. If they quote rates freely, they may be reprimanded by the CBN.”
The CBN abandoned a 16-month currency peg on June 20 and adopted flexible foreign exchange policy which gave the naira greater flexibility to adjust against the dollar.
“The average daily turnover in the spot market used to be $1 billion and now it’s less than $100 million. I don’t believe the parallel market is illegal any more. We have inadvertently legitimised it through some of our actions. It may no longer be as small a market as we used to think. If you have $1,000 to convert to naira, will you sell it at 315? No rational person will do that. You’ll sell to a bureau de change and get N460,” Onadele, a former chief dealer at Citigroup Inc.’s Nigerian unit said.
Since the devaluation some bond investors, including Cape Town-based Allan Gray Ltd., have bought Nigerian T-bills, which yield as much as 20 per cent. Most are still too worried about the prospect of a further fall in the naira to re-enter the market, Onadele told Bloomberg. Naira one-year forward contracts traded at a record high of N430 per dollar on Friday, suggesting further weakness is in store.
”No one believes the N305 price of the naira on their screens,” Onadele said. “That devaluation risk is still there. It would only melt away when the market establishes a credible price formation on the back of transparent trading operations by the banks. We need to have proper price discovery.”
Some banks and offshore traders were thinking of shorting the dollar when the naira dropped to around N360 in mid-August, which suggested that was “almost the equilibrium point,” he said.
The CBN felt the need to halt the depreciation at that point “through strong moral suasion,” Onadele said. “The interference was obviously not appreciated by both the domestic and international sellers, as supply of foreign exchange dried up.”
Also speaking at the launch of the 2016 Banking Sector Report by Afrinvest, the Emir of Kano, Mohammed Sanusi II, praised the CBN for adopting a flexible exchange rate policy, but urged the apex bank ‘to fully allow the flexible exchange rate to work without interruption’.
He said taking such decision would require courage. “And these things really require courage, because some of the decisions you will take, will seem to fly in your face in the first week or two. But look at the fundamentals. The naira today is undervalued. The fixed income is suffering high yields. The Lagos Stock market, if you look at the assets prices picking ratios, you got a gross undervaluation. If you allow people to come in and sell their dollars at market prices, people see they are going to make profits in the equities market and fixed income and currency appreciation,” he said.
Sanusi added: “So, long as you do not allow that, you will not have the float you want. Now, it is the inflow of the dollars into the economy that will take the naira towards its fair value and take it to where you want it to be not by fiat. The market does not accept orders. It will never happen, it has never happened,” he said.
“We need the CBN to take that risk, and courage to implement the flexible foreign exchange policy. Let the market work in the next two or three weeks and see, as people know they can come in, sell their dollars, buy stocks, sell their dollars, fixed income, make a profit in currency and capital acquisition, you are going to have gradually narrowing of the gap between the interbank and the parallel rate and have more liquidity in the market,” he said.
Managing Director, Afrinvest West Africa, Ike Chioke, said dollar scarcity at the official market was reaffirmed by drop in daily foreign exchange turnover to about $1 billion, while approximately $100 million was recorded as unmet demands.
“Accordingly, investor sentiment remained depressed by currency risk as liquidity crunch lingers. Performance at the parallel market however improved as the naira firmed against the dollar on all trading days of the week amid reports of dollar sales to Bureau De Change operators by Travelex. Parallel market rates closed at N460 to dollar on Friday,” he said.
“In the interim, we expect spot rates at the interbank to trade within a tight band while the CBN continues to intervene. However, reports that the CBN has suspended a number of banks from selling dollars to Bureau De Change operators may pressure rates at the unregulated segment of the forex market,” he said.
